Brazil’s Vale halts $6bn Argentine potash project

Brazilian miner Vale SA said on Monday it has suspended a $6 billion potash project in neighboring Argentina that has been plagued by cost overruns, a decision that could renew trade tensions between South America’s two largest economies.

Vale said its Rio Colorado potash project in Mendoza province was no longer “in line with Vale’s commitment to discipline in capital allocation".

The company had put the project under review for suspension in December. Vale left the door open to restarting the project, however, if terms were to improve. It said more than 4,000 of the project employees would have preference in rehiring “if construction resumed," setting the stage for more negotiations with Buenos Aires over terms that would make it viable.

Vale has invested $2.2 billion in Rio Colorado to date, one of the biggest foreign capital investments in Argentina, and has completed work on 40 percent of the mine, railway and port.

If Vale eventually exits Rio Colorado, it would be a blow to Argentina’s president, Cristina Fernandes, during a legislative election year. The project would have made Argentina one of the world’s leading suppliers of potash, an essential fertilizer component in food production.

TRADE TENSIONS

The failure to find middle ground on the project complicates relations between Brazil and Argentina at a time when growth in global trade is slowing and tension between the two countries is already growing. New barriers in Brazil chilled the regional trade in auto parts last year, contributing to a contraction in Argentina’s auto industry.

The two countries also exchanged accusations over trade obstructions after Argentina started slowing its import process, helping to prop up local industry and its trade balance. Brazil’s state-run oil company Petrobras is in talks to sell off some $400 million worth of Argentine refineries and other assets, Reuters reported last month.

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Officials in Argentina did not immediately comment. If Rio Colorado does not go ahead, the farm sectors in Brazil and Argentina will remain dependent on potash imports from a small cartel of global suppliers in Canada, Russia and Jordan.

Brazil imports 90 percent of its potash.

STAKES

Analysts said Rio Colorado likely will not have a major financial impact on Vale, no matter whether the project is sold or resumed, considering that 90 percent of the company’s revenues and much of its investments are still in iron ore.

“This change was already well-defined," said Aluisio Lemos, an analyst at Agora Corretora in Rio de Janeiro. “The tone set by the current management has already been about prioritizing certain projects and exiting others that are not considered strategic."

Vale posted its first quarterly loss in 10 years last month, taking a $5.7 billion hit from money-losing operations. Though the world’s second largest mining company says it remains committed to the fertilizer sector, it is part of a broader shift among miners away from less profitable assets in the face of lackluster metals prices.

Preferred shares of Vale reversed losses in Sao Paulo trading after the announcement, to gain 1.4 percent at close. Brazil’s Folha de S.Paulo newspaper reported over the weekend without naming sources that Rio Colorado’s cost overruns had jumped 86 percent since the initial estimate to $11 billion.

Part of the problem has been inflation in Argentina, which according to private estimates has surpassed 25 percent per year and driven up labor and materials costs. Vale had been trying to get the Argentine government to waive value-added taxes until production at the mine starts, a benefit that could have saved Vale about $1 billion, according to Argentine market sources.

Vale said in response to questions about the Folha report that it was seeking no changes to Argentine labor or tax law.

In his last call with analysts in February, Vale chief executive Murilo Ferreira said the project “needs to remain attractive and have a foreseeable cash flow," adding that the company was still open to talks with the Argentine government